May Industrial Production, Consumer Prices, June UI Claims

Industrial Production for May decreased by 0.1 percent, the second drop in the last three months.

The Consumer Price Index for May decreased by 0.3 percent as energy prices fell.

The core CPI gained 0.2 percent for the month, driven by gains to apartment rents.

Initial Claims for Unemployment Insurance increased by 6,000 for the week ending June 9, to 386,000.

U.S. industrial production slipped by 0.1 percent in May; now down 2 out of the last 3 months. Weakness in May came from the manufacturing sector where output fell by 0.4 percent as auto assemblies cooled. Total output for motor vehicles and parts fell by 1.5 percent as auto assemblies pulled back to a 10.39 million unit pace after ramping up in April. Utilities output appears to be back on an even keel, gaining 0.8 percent in May after seasonal adjustment. Warm winter weather is responsible for gyrations in that series from late 2011 into early 2012. Mining output gained 0.9 percent in May, its first gain since January. Overall capacity utilization fell to 79 percent, still well below historical norms. The Consumer prices fell by 0.3 percent in May as energy prices dropped. Food prices were unchanged for the month. The energy index, which captures both gasoline and home heating fuels, dropped by 4.3 percent in May. Excluding food and energy, the core CPI gained another 0.2 percent in May, boosted by increasing apartment rents. Initial claims for unemployment insurance increased by 6,000 for the week ending June 9, to 386,000. The level is not terrible, and is consistent with ongoing job gains. However, the trend in initial claims since March has been increasing; not a good sign. Short up-trends in this series are not at all unusual, even in an expanding economy, but this bears watching. The New York Fed’s Empire State Manufacturing Index for June fell to a still-positive 2.2, indicating growth, but cooler growth in that region. The University of Michigan’s consumer sentiment index fell in June to 74.1.

U.S. economic data point to a downshift in momentum beginning in March. Some of the March-June slowdown can be attributed to weather given that unusually mild winter weather coincided with stronger U.S. data from December through February. However, that looks to be only part of the story. The slow-motion train wreck called the Euro-zone remains an unsettling spectacle. Beyond the depressive effect on animal spirits worldwide, we are now seeing a direct drag on U.S. trade because of the spreading recession in Europe. U.S. merchandise exports to the Euro-zone went negative on a year-over-year basis in April, down 4.70 percent. Moreover, the spreading malaise in Europe is eating at their banking system, which is linked to ours. As if the Euro-flu was not enough, we are also seeing cooler growth in Asia. China has begun to ease monetary policy in response to weakening demand for its exports. Then we come to the “Fiscal Cliff,” which is going to knock the U.S. economy back into recession in early 2013 if nothing is done to smooth it out, according to the Congressional Budget Office. All told, a dark and scary stage is set for next week’s meeting of the Federal Open Market Committee. The FOMC has the opportunity to launch new monetary stimulus coordinated with Chinese monetary easing, expected European Central Bank easing, and Bank of England monetary easing. QE3, if launched next week, may be a short-term lifeline for the U.S. economy, but it must be followed by Congressional action on the Fiscal Cliff to clear the way for U.S. economic growth in 2013.

Market Reaction: Equity markets opened with gains as expectations for Fed action increased. Treasury yields are down. Oil is up to $84.11/barrel. The dollar is down against the yen and up versus the euro.